SUMMARY OF COMMENTARY ON

CURRENT ECONOMIC CONDITIONS

BY FEDERAL RESERVE DISTRICT

AUGUST 1993

TABLE OF CONTENTS

SUM M ARY ..... ...... ............ .................. .. i

First District - Boston ....................... I-

Second District - New York ............... I-1

Third District - Philadelphia ............. -1

Fourth District - Cleveland ............. IV-1

Fifth District - Richmond ................. V-1

Sixth District- Atlanta....................... VI-1

Seventh District - Chicago ................. VII-1

Eighth District - St. Louis ................. VII-1

Ninth District - Minneapolis............... IX-1

Tenth District - Kansas City................X-1

Eleventh District - Dallas .................... XI-1

Twelfth District - San Francisco ........ XII-1

SUMMARY *

Slow to moderate growth characterized economic conditions in most Federal

Reserve districts in late July and in August. Geographically, economic growth appears

weaker on the East and West coasts while central areas such as Cleveland, Dallas,

Kansas City and Minneapolis report stronger than average growth. Employment

continues to grow slowly in spite of large companies' continued efforts to restructure

and cut labor costs. Manufacturing reportedly is improving in several districts. Home

construction is strong in many districts compared to a year ago, and a few see some

improvement in commercial real estate markets. In agriculture, several districts

describe weather-related damage to crops but note generally favorable conditions for

livestock producers. Mining shows little overall change, but there is some increase in

oil and gas exploration. Small increases in loans are noted in some districts, and some

business lending rates reportedly have fallen. General retail sales show a mixed

pattern, with strength in several districts but weakness in the remainder. Auto sales

are strong in most districts. Tourism is a bright spot for some districts. With the

exception of lumber, prices are generally stable and there is little evidence of

inflationary cost pressures.

Labor markets

Continued corporate restructuring is taking the bloom off employment growth.

Cleveland indicates that several manufacturers emphasize near-term revival in

employment growth is unlikely, since curbing labor costs appears to be the favored

option for improving profits in view of uncertainty over sales. Several large firms in

the Minneapolis and New York districts recently have announced sizable layoffs.

Boston and Philadelphia look for no change in manufacturing employment, and

* Prepared at the Federal Reserve Bank of Minneapolis and based on information collected before

August 31, 1993. This document summarizes comments received from businesses and other contacts

outside the Federal Reserve and is not a commentary on the views of Federal Reserve officials.

Richmond foresees a decline. In the St. Louis district flooding is still keeping some

people from working.

But some districts also state that labor markets may be reviving. Several

manufacturers, according to Dallas, have boosted employment, and in the Cleveland

district retailers report cautious hiring. Some Minneapolis district firms have recently

added workers. Moreover, even though employment has continued to decline in the

New York district, the recent pace of decline has been modest.

Manufacturing

Manufacturing production and sales are increasing in many districts. Several

districts report strong sales for firms making building materials or construction-related

items. Boston notes double-digit sales increases for automotive and electronics

products compared to year-earlier levels. Cleveland reports a surge in appliance

production and indicates that sheet steel and heavy truck manufacturers are operating

at capacity. Chicago also notes very strong heavy truck sales along with strong light

vehicle assembly. St. Louis lists improved business for petroleum equipment and

apparel. Dallas also notes improvements in oil field equipment, in addition to strong

orders for semiconductors and telecommunication devices. San Francisco describes

improvements in semiconductors and electronics. Respondents to a Richmond survey

of manufacturers are optimistic about prospects for the next six months.

The situation for some products varies by location. Dallas, Minneapolis and San

Francisco have positive comments about food processors, but Boston reports food

manufacturing output as flat. Similarly, Atlanta, St. Louis and San Francisco see

strength in the furniture industry, which is described as flat for Boston. Textile sales

are reportedly declining for Atlanta and Boston, but higher in California.

In the Atlanta, Boston and San Francisco districts the aerospace and defense

industries are still weak, as are chemicals and petroleum for Dallas.

Construction and real estate

Home construction is improving in many regions. For Dallas and Minneapolis,

residential construction is strong. Home building reportedly is picking up momentum

for St. Louis, and sales and permits rose for Richmond, particularly in the Carolinas.

While housing starts for Kansas City were slightly below year-ago levels, they are

rising and expected to continue to increase. San Francisco describes regionally mixed

conditions, with strong construction in Arizona, Idaho, Oregon and Utah, but relative

weakness in California, Hawaii and Washington. New York notes no change in home-

building activity, and Philadelphia describes the pace of construction and sales as about

even with last year. In non-residential construction, Minneapolis reports strong

commercial and public building across its district.

Boston and New York see some improvement in commercial real estate markets.

New York describes the sale of a new, large office building as eliciting greater than

expected interest and selling for a higher price than expected. According to Richmond,

commercial real estate markets have improved in Virginia and the Carolinas but are

slow elsewhere. For Philadelphia, commercial real estate is stagnant.

Agriculture, mining and energy

It is either too wet or too dry for normal crop development, according to reports

from several districts. Continued drought has damaged corn, sorghum, tobacco and

other crops as well as pastures in the Dallas and Richmond districts and in southern

portions of the St. Louis district. On the other hand, flooding and excess moisture are

the principal problems for Chicago, Kansas City and Minneapolis. These districts

report substantial damage to corn, soybean and spring wheat crops. Slow crop

development caused by unseasonably cool, wet weather has left many crops in the

Midwest vulnerable to damage from early frosts.

But some positive crop developments are also noted. Scattered rains brought relief

for some crops in Richmond's area, while Dallas reports good cotton crops in west and

northwest Texas and estimates that overall crop output will be up from last year, in

spite of dry conditions. Winter wheat production is good for Kansas City and excellent

for the Minneapolis district. Cotton and peanuts in Oklahoma are reportedly in good

condition. And San Francisco reports generally favorable agricultural output. The

livestock sector is generally better than crops, with favorable range conditions in most

areas and strong prices. Kansas City notes that cattle feeders reduced inventories

somewhat in response to higher feed costs.

According to San Francisco, new mines are opening in Nevada in response to

higher gold prices. An existing gold operation in South Dakota is contemplating

expansion. Mining is stable for Minneapolis, though a strike at four iron mines in

August cast a cloud over increased production in that sector. Dallas reports rising oil

and gas drilling rig counts compared to earlier in the year and describes activity in the

Gulf of Mexico as very strong. Kansas City also notes that drilling rig numbers

continue to rise and are substantially above 1992 levels. St. Louis reports that lumber

producers are rebuilding inventories.

Financial institutions and credit

Most districts report slight increases in loan volumes. Consumer borrowing and

mortgage financing are up modestly in Atlanta, Chicago, Cleveland, Dallas, Kansas

City, Philadelphia, Richmond and parts of the San Francisco district. Mortgage

refinancing is especially strong in Atlanta, Philadelphia and Richmond.

Commercial and industrial loans, however, are generally flat across the country,

though there are signs of improvement. Philadelphia reports that business loans may

increase as previously postponed projects are reviewed. Loan volumes in California

continue to decrease, though at a slower pace than in recent months. Chicago and

Dallas observe that increased competition among banks in their districts is bringing

down rates for prospective borrowers, and New York notes that about half of surveyed

loan officers report moderately lower rates.

Consumer spending and tourism

General retail sales are strong in several districts, but weak in the remainder. For

Cleveland, durable goods are moving well. Several retailers in the Kansas City and St.

Louis districts report moderate increases in sales over last year. In California and New

York sales are flat and mixed respectively. However, sales are unseasonably slow for

Atlanta and Boston, and Minneapolis indicates that strength earlier in the year has

ebbed somewhat. Boston, Chicago, Cleveland, Dallas and Richmond report that retail

inventories have returned to satisfactory levels.

Auto sales are strong in most districts. Cleveland notes that dealers of domestic

new cars and light trucks enjoyed the best summer sales in more than five years. St.

Louis car dealers report that sales of new and used domestic cars are up, in many cases

by 10 percent In the Philadelphia district, auto sales are running above year-earlier

levels, while Minneapolis characterizes them as stable. While domestic auto sales have

climbed, import sales, especially of Japanese cars, have dropped according to

Cleveland and St. Louis.

Tourism is cited as a bright spot for several districts. Chicago, Minneapolis and

Richmond report strong summer seasons. According to San Francisco, Idaho and Utah

are enjoying record years, but Hawaii's visitor industry has slumped.

Prices

Atlanta, Boston, Dallas and Kansas City report little or no change in prices. Food

prices, according to Minneapolis, are stable, and gasoline prices continue below year-

earlier levels. Boston and Kansas City say retail prices are holding steady, and Dallas

states strong competition has been restraining retail price increases. While Kansas City

area manufacturers indicate input prices are modestly higher than a year ago, Atlanta's

factory contacts report stable prices for both raw materials and finished goods. Prices

are even flat for manufacturers in strong markets, Boston observes.

Lumber is an exception to this pattern of stable prices. In the Atlanta district, home

builders note lumber prices are beginning to rise again in anticipation of increased

demand from rebuilding in Midwestern flood areas. Lumber prices, San Francisco

says, are up about 30 percent from a year ago.

FIRST DISTRICT - BOSTON

On balance, the First District economy appears to be expanding

only marginally. Retail sales are flat to down among contacts reached

in late August. Manufacturing growth is uneven, and respondents report

competitive price pressures even in relatively strong areas like

automobiles and electronics. Commercial construction shows scattered

improvement. Asset managers are experiencing higher sales.

Retail

First District retail contacts report sales results ranging from

unchanged to more than 5 percent below year-ago levels. Respondents

observe that sluggish employment growth continues to inhibit spending.

Also, retailers in northern New England believe the strength of the U.S.

dollar has adversely affected trade with Canadian tourists.

Both costs and selling prices are largely unchanged. Retailers

report that inventory levels generally are satisfactory, but, in the

absence of sales advances, they are monitoring their stocks closely.

Most retail contacts intend to renovate some stores or upgrade

equipment, and a minority plan to expand their locations. Employment is

increasing only to staff new locations. Looking forward, contacts

express concern that economic progress may have stalled.

Manufacturing

Manufacturers of automotive and certain electronics products are

experiencing double-digit sales increases over year-ago levels.

Construction-related sales are improving moderately, with some boost

from rebuilding in hurricane- and flood-damaged areas. By contrast,

contacts indicate zero to very modest sales increases for food,

furniture, miscellaneous machinery, and products used by the

I-2

pharmaceutical industry. Sales of textiles for apparel, heavy

machinery, and medical equipment are declining significantly. Demand

for aircraft engines and parts also is reported to be sluggish, except

by one manufacturer with increased foreign orders.

Almost all contacts cite downward pressure on prices. The

majority, including those in strong markets, indicate that their selling

prices are flat. Medical equipment suppliers have reduced their prices,

by as much as 15 percent. Materials costs are flat or up just slightly.

A growing number of contacts indicate that they are pressing suppliers

to reduce prices--with some success where markets are competitive. By

exception, lumber prices have reportedly risen by about 20 percent over

the past year, and one contact anticipates a double-digit increase in

the price of steel after a three-year freeze.

Employment has risen substantially at two contacts over the past

year, but most report declines in the range of 1 to 10 percent. The

majority expect the size of their work forces to remain steady in coming

months, although some are continuing to reduce their numbers through

attrition or layoffs. One manufacturer of auto parts intends to hire

additional workers, and two other contacts mentioned the

possibility of increasing overtime if demand continues to improve.

Capital spending remains concentrated on modernization and automation,

but about one-third of this month's contacts intend to expand capacity.

Most manufacturers feel that the economy at large will provide

very little help to their business over the coming year. Over half

mentioned higher federal taxes as a negative factor, and some voice

concern about uncertainties resulting from pending health care reform.

Commercial Real Estate

The commercial real estate market has shown signs of improvement

over the last three months. The apartment and retail markets reportedly

are attracting some new investment. Results in the office market are

more mixed. Sales of existing office buildings have picked up in some

suburban Boston locations as buyers appear to have gained confidence

that the market has bottomed. One contact notes that prices may be up

10 to 15 percent, while another indicates that prices have increased

only for the most desirable, well-leased buildings. Vacancy rates in

the greater Boston office market increased slightly in the first half of

the year, mostly because of a drop-off in large lease signings. Office

leasing in the Hartford area is reported to be slow, with vacancy rates

continuing to rise. According to one contact, recovery in Connecticut

real estate is at least six to twelve months behind the rest of New

England.

Nonbank Financial Services

Investment management companies report strong sales. Increases in

assets under management ranged from 4 to 10 percent between the first

and second quarters of 1993. Sales were strongest in tax-free bond

funds and equity funds. Venture capital contacts report that firms in

communications software and health care cost containment experienced

strong growth in the second quarter, while retailers are said to have

had mixed results.

II-1

SECOND DISTRICT--NEW YORK

On balance, economic developments seemed slightly more positive in recent weeks,

although some negative reports continued to be received. Sales results varied widely at District

retail stores during July and early August. Respondents reported no noteworthy change in

homebuilding activity in recent weeks, and now expect housing starts to top last year's relatively

low levels, though not by much. In the commercial real estate market the sale of a nearly vacant

new office building in mid-Manhattan reportedly elicited more interest and sold for a higher price

than many had expected. New York's unemployment rate decreased to 7.5 percent in July from

7.8 percent while New Jersey's rate held steady at 6.9 percent. Most senior loan officers

surveyed at small and midsized banks indicated no recent change in their willingness to lend.

Consumer Spending

Sales results varied widely at District retail stores during July, and early August data

indicated a continuation of this pattern. Fans and air conditioners were strong sellers in July as

most of the District experienced record-high temperatures, and other items for the home also

fared well. Sales of women's apparel and cosmetics were strong at some stores but quite weak

at others. Some retailers attributed their lower apparel sales to the fact that they had smaller-

than-usual stocks on hand for this year's July summer clearance.

Over-the-year sales changes ranged from -14 percent to +18 percent but despite several

negative results, only one chain stated that inventories were somewhat worrisome. Stores were

fairly evenly divided between those falling below and those exceeding plan. One chain with

lower-than-expected results had moved a large promotional event from July to August and

apparently underestimated the impact this would have on July sales. Several respondents were

cautiously optimistic about the outlook, citing a continued lack of consumer confidence as the

reason for their caution.

II-2

Residential Construction and Real Estate

Respondents report essentially no change in homebuilding activity in recent weeks. Some

noted a slight slowing of traffic and sales but stressed the fact that traffic has exhibited an up and

down pattern over a period of time. The IBM layoffs have begun to have a negative impact in

the Hudson Valley area, however, with an increasing number of homes being added to the resale

market. Uncertainty about the economic outlook and concern about job security were factors

mentioned as continuing to dampen demand for new homes in several other parts of the District

as well. Low interest rates and stable home prices are sustaining some demand, however, and

credit seems somewhat more available than had been the case, particularly for large builders.

Housing starts are expected to top last year's relatively low levels throughout the District though

not by large amounts.

In the commercial real estate market the recent sale of a 42-story, nearly vacant new

office building in mid-Manhattan reportedly elicited more interest and sold for a higher price than

many had expected. The buyer, Morgan Stanley, noted that a number of its businesses have been

growing and that the new building will fit in with its expansion plans. Some other financial

services firms in Manhattan also have already increased or plan to increase their space when

negotiating new leases.

Other Business Activity

New York's unemployment rate decreased to 7.5 percent in July from 7.8 percent in June

while New Jersey's rate held steady at 6.9 percent, just above the national average. While

employment has continued declining in the District, the recent pace has been modest. Moreover,

a recent BLS report noted that, despite its employment doldrums, New York City wages and

salaries grew by a sizable amount in 1992 even when the highly-paid Wall Street firms are

excluded. New York State payrolls also rose in 1992, though by a smaller amount.

The July surveys of purchasing managers in Buffalo and Rochester indicated some

improvement among manufacturers in those areas. Rochester had a sizable increase in the per-

II-3

centage of firms stating that general business conditions were better: 38 percent in July from

20 percent in June. A higher percentage of Buffalo firms reported a rise in output in July and,

though the percentage with a gain in new orders fell, the percentage with the same or increased

new orders rose.

The District's employment outlook was dimmed by several announcements of future job

reductions. The largest of these were IBM's planned cutback of another 35,000 and Kodak's

additional downsizing of 10,000. Smaller cutbacks of 3000 and up to 1500 are in the offing for

Johnson and Johnson and New York's Empire Blue Cross. Most of these numbers pertain to

worldwide operations and no information is currently available as to the local impact. On a

smaller scale, Martin Marietta will cut almost 500 Albany-area jobs and will decide by October

whether to close any of several other plants in New York which it acquired in its recent purchase

of GE's aerospace division.

Financial Developments

Most senior loan officers surveyed at small and midsized banks in the District indicated

that they are as willing to lend as they were two months ago. Loan rates decreased slightly in

the last two months as roughly half of the surveyed loan officers reported moderately lower rates

while the rest reported theirs unchanged. Overall loan demand was reported to be generally

stable. Approximately three-fifths of the respondents reported steady demand while the

remainder was evenly divided between those with higher and lower demand. With regard to

specific categories, most surveyed loan officers reported that demand for consumer loans was

unchanged and that mortgage demand and refinancing activity remained stable over the last two

months. Business loan demand showed continued signs of sluggishness as two-thirds of the

respondents indicated stagnant demand while others noted only slight increases or decreases. In

addition, approximately 90 percent of respondents reported either no change or a moderate

decline in loan delinquency rates during the last two months.

III-1

THIRD DISTRICT - PHILADELPHIA

Reports from various sectors of the Third District economy were mixed in

August, although indications were that overall activity was steady.

Manufacturers reported steady orders but a drop in shipments. Retailers

indicated sales were seasonally slow but slightly above the level in August of

last year. Auto dealers said an upward trend in sales persisted through the

month. Bankers generally indicated that overall loan volumes were edging up,

with weakness in commercial loan demand being offset by increased consumer

lending. Mortgage refinancing volume was growing. Realtors and builders said

sales were up compared with last year for new and existing homes in lower price

ranges, but were off for higher priced homes. Commercial real estate activity

remained weak, especially in the Philadelphia central business district, but

there were some reports that demand for office space in suburban areas was a bit

firmer.

Looking ahead, manufacturers expect conditions to improve, but they do not

plan to step up hiring. Retailers express cautious optimism for the fall, and

auto dealers expect the upward trend in sales to continue through the rest of the

year. Bankers generally expect consumer lending to continue moving up modestly,

but most do not expect commercial loan demand to strengthen in the immediate

future. Realtors anticipate continued weakness in commercial real estate

activity.

III-2

MANUFACTURING

Third District manufacturers continued to report slack conditions in

August. Around half said new orders and shipments were running at a steady pace.

While as many firms reported increases in orders as reported decreases, the

number of firms that indicated shipments had dropped was slightly greater than

the number that posted increases. Around three-fourths of the firms contacted

in August said they were holding payrolls steady, but nearly one-fourth were

making cuts. Inventories were generally described as steady.

Looking ahead, nearly half of the manufacturers surveyed in August expect

conditions to improve over the next six months, while only one in ten anticipates

further weakening. On balance, industrial firms in the region expect rising

orders and shipments. Overall, area firms' plans for the next six months call

for some slight increases in capital spending but no change from current

employment levels.

RETAIL

Most of the Third District retailers contacted in late August said sales

were seasonally slow as the back-to-school shopping period was just getting under

way. Many noted that sales were running a bit above the pace set last August,

and they expect slight year-over-year gains to persist through the fall months.

Auto dealers generally indicated that sales in August were above the level of

August 1992. They expect the growth trend that began this spring to carry

through the rest of the year.

FINANCE

Total loan volume outstanding at major Third District banks was edging up

in August, according to reports from bankers. Most said that consumer lending

was rising while commercial and industrial loan volumes were steady or easing.

III-3

Bankers also said that home mortgage refinancing activity was strong, with

borrowers preferring fixed-rate loans.

While most bankers said they did not expect commercial loan demand to

increase in the immediate future, some said discussions with potential business

borrowers indicated that commercial loan demand could begin to improve as

previously postponed capital spending projects are reviewed. Bankers generally

expect consumer loan demand to remain on a modest upward trend. While some noted

signs of increasing home sales and purchase-mortgage originations, the gains are

not expected to be strong.

REAL ESTATE AND CONSTRUCTION

Third District contacts in residential real estate and construction

indicated that the pace of new home construction and sales this summer has been

about even with last year's rate. For both new and existing homes, realtors said

there was strong demand for those in the price range associated with first-time

home-buying. They said these homes were selling at a better rate than last year

because of lower mortgage rates and some easing in price from prior years.

Several realtors noted slower sales and growing inventories of existing homes for

sale in higher price ranges.

Commercial real estate activity remained slow, according to realtors and

property managers contacted for this report. The demand for office space in

Philadelphia was weak, according to real estate contacts, while demand in

suburban areas appeared to be somewhat firmer. Real estate contacts expect

demand for office space to remain soft as a result of the slow job growth they

anticipate.

IV-1

Fourth District - Cleveland

Summary. Growth in District business activity has been driven by brisk retail sales

and steady gains in production. Strong demand for furniture and appliances and

exceptional new-car sales have helped to sustain significant overall retail sales growth

during the last two months. Manufacturers generally report strong orders. Steel

producers (except for plate steel) continue to operate near capacity, and automakers

expect higher production this quarter compared with 1992:Q3. Mortgage refinancing

accounts for much of the moderate rise in loan demand, and some banks have noted a

decline in deposits.

Consumer Spending. While total retail sales have continued to make significant

gains in July and August, product demand has varied by type of retailer and product. The

larger department stores appear to be the major beneficiaries of higher sales, although

certain discount chains continue to do well. Despite heavy sales promotion by some

specialty stores, this segment of the market continues to lag.

Retailers report that durable goods, including furniture, hardware, and appliances

and electronics, have been moving well. Respondents attribute the strong demand to

factors such as improving home sales, weather, and some pent-up demand for durables.

Sales of apparel and of other nondurable items have been sluggish. Yet, aggressive

clearance promotion has prompted some movement of these items, pushing inventories

below the excesses reported earlier this year, particularly by department stores.

Although back-to-school sales have started slowly, retailers are cautiously

optimistic about the fall season. This positive attitude is buttressed by the region's better-

than-average sales performance and by the anticipation of only moderate price increases

on fall items.

Dealers of domestic new cars and light trucks report the best summer sales season

in more than five years. While the most dramatic increases occurred earlier in the summer,

IV-2

demand has continued to improve in August, with sales running 5 to 10 percent above the

same period a year ago. Some sources insist that sales could have been even better were it

not for shortages of many popular models and options. In contrast, unit sales of Japanese

nameplate vehicles are lower than last year.

Manufacturing. The durable sector continues to spearhead gains in manufacturing

output. Orders and production of appliances surged in July, spurred by the heat-related

demand for air conditioning and refrigeration units. Heavy-duty truck makers report that

operations continue to be at capacity, and they expect that output this year will be the

highest since 1977. Producers also note a steady pickup in orders for medium-sized

trucks.

Steel producers anticipate that output for the remainder of the year will exceed

levels attained during the first half. Sheet steel facilities continue to operate at virtual

capacity, and order books are full well into the fourth quarter. Plate steel producers,

however, report a softening in orders for the second half of the year. They attribute the

slowdown to the deferment of investment in barges and freight cars until facilities

destroyed by the Midwest floods are rebuilt.

A producer of power-generating equipment reports that domestic demand has

slowed considerably in recent months. The respondent speculates that customers have

delayed projects because of uncertainty about the economy and about pending legislation

affecting energy and waste disposal.

District manufacturers anticipate that exports to Europe may be dampened by the

latest run-up of the dollar vis-à-vis European currencies. Some also note scattered signs

that the yen's appreciation may have slowed the growth of Japanese imports, although the

impact to date is thought to have been moderate. A large steel producer reports some

resistance from auto transplants to switch existing relationships with Japanese steel

producers even though the strong yen may have temporarily left Japanese steel at a

IV-3

competitive disadvantage. However, some respondents anticipate that the yen's rise will

allow domestic automakers to gain greater market share at home.

Employment. Several manufacturers emphasize that near-term revival in

employment growth is unlikely, because curbing labor costs appears to be the most

appropriate option for improving profits in view of uncertainty over sales. For instance,

although auto producers expect higher output this quarter, they plan to add on only a

minimal number of workers. Retailers also report cautious hiring for the balance of this

quarter.

Financial Institutions. Depository institutions continue to report that home

mortgage financing is the main source of new loans, as interest rates in the District have

receded to as low as 7.0 percent for a 30-year fixed-rate mortgage. However, several

lenders note that the low rates have not spurred as many new mortgage applications as

expected, particularly in Cleveland, where home sales and starts trail last year's pace.

Respondents describe business loan volume in July as slow or shrinking, but they

indicate that consumer installment loans continue to grow moderately. Bank officials also

report further declines in deposits, resulting largely from losses of maturing certificates of

deposit.

FIFTH DISTRICT-RICHMOND

Overview

The District economy continued to grow sluggishly during late July and

the first three weeks of August. Hot, dry weather boosted tourism but

dampened shopper traffic at retail outlets, pushed up manufacturers' costs,

and devastated crops. Credit demand strengthened slightly as did residential

and commercial real estate activity. At District ports, exports fell but

imports rose.

Consumer Spending

Our regular mail survey indicated that retail activity was mixed in late

July and early August. Respondents reported that sales rose slightly, even

though big-ticket items decreased somewhat. Wages increased, as did wholesale

and retail prices, while employment and inventories were lower. Capital

expenditures were reported to be flat.

Survey respondents were optimistic about their prospects for the next

six months. They expected increases in all indicators except sales of big-

ticket items, which they believed would be unchanged.

Manufacturing

Our survey of manufacturers indicated that District activity continued

to hold steady in late July and early August. Respondents indicated little

change in most indicators, although raw materials prices rose and new orders

fell slightly. Manufacturers cited government regulations and weak product

demand as their most important problems, and they noted that the summer's hot

weather had pushed up their production costs somewhat.

Respondents were optimistic about their prospects for the next six

months. They anticipated increases in most indicators, but expected

V-2

inventories and the number of employees to decline. They anticipated no

change in backlogs and employee hours.

Tourism

Hotels, motels, and resorts throughout the District indicated that

tourist activity for July and the first three weeks of August was higher than

in June and a year ago. Respondents attributed the increases to unseasonably

good weather. All respondents noted that their summer bookings increased when

compared to a year ago, and most expected tourist activity to continue to

improve during the next six months.

Ports

Representatives at District ports--Baltimore, Charleston, and Hampton

Roads (Norfolk)--indicated that exports were lower and imports were higher in

July than in June and a year ago. Hampton Roads expected exports to increase

during the next six months, while Baltimore and Charleston expected export

volume to be unchanged.

Finance

District financial institutions contacted by telephone indicated that

credit conditions improved slightly over the last five weeks. Respondents

stated that commercial loan demand was flat while consumer loan demand

strengthened somewhat. Interest rates were steady on commercial loans and

somewhat higher on consumer loans.

Residential mortgage demand increased during the past five weeks.

Refinancing activity increased significantly, while mortgage originations were

flat. Residential mortgage lending rates were moderately lower.

Residential Real Estate

Real estate analysts and homebuilders surveyed by telephone reported

that residential activity increased throughout the District during the past

six weeks. Residential sales and building permits rose on a seasonally

adjusted basis, as did home prices, particularly in the Carolinas. Most

respondents indicated that higher prices reflected both higher building

materials costs and stronger demand. Some also attributed increased prices to

a lessened availability of residential lots and to increased regulatory and

labor costs.

Commercial Real Estate

Commercial real estate activity was mixed during the past six weeks; it

improved in Virginia and the Carolinas, but remained sluggish elsewhere.

Office building and retail vacancy rates continued to edge down, and no

speculative construction was reported to be underway. However, some analysts

anticipated speculative office building activity in some areas as early as

next year. Commercial rental rates remained steady throughout the District

except in Raleigh, where they were higher.

State Tax Revenues

State tax analysts reported that revenue growth implied real economic

growth of 2 to 3 percent in most District states. South Carolina's economy

appeared to be growing at a slower rate, partly because of military cutbacks.

In the District of Columbia, real revenues continued to shrink.

Agriculture

Agricultural analysts reported that scattered rain across much of the

District in August brought relief to some crops but arrived too late for

others. Drought damage to corn, sorghum, and tobacco reduced their expected

yields substantially. The soybean and hay crops benefited from the August

precipitation but remained in poor condition. As of late August, estimates of

drought-related damage in the District approached $600 million.

VI-1

SIXTH DISTRICT - ATLANTA

Overview: Reports from Sixth District contacts indicate that economic activity in the

Southeast grew somewhat more slowly in July and August than during the first half of the year.

After recording relatively strong growth in the first two quarters, retail sales gains tapered off

early in the third quarter and have maintained this slower pace of growth since. Reports from

manufacturers also varied over the same period. Firms in the apparel, packaging, and aerospace

industries reported decelerations in new orders and current production, while manufacturers of

home furnishings, appliances, and building materials reported steady to slight improvements in

overall activity. Demand for housing-related items continues to be supported by single-family

home sales and construction, which have remained healthy in most of the Southeast. Multifamily

and commercial construction activity, however, has continued to be sluggish. According to

bankers, consumer loan demand increased slightly during the last two months, while commercial

lending was generally flat over the same period. Prices generally were said to be stable; some

firms reported modest wage increases.

Consumer Spending: Retailers reported that consumer spending growth slowed

unseasonably in July and August. Sales of apparel and other consumer nondurables were said

to be particularly sluggish. Although sales of furniture, appliances, and automobiles have

continued to improve on a year-over-year basis, recent gains have been more muted than earlier

in the year. While most retailers reported that they continue to expect sales during the upcoming

holiday shopping season to equal or surpass year-ago levels, they said that the recent softening

in consumer demand has made them more cautious in placing orders. Tourism remains strong

VI-2

in the Southeast. Hotel occupancy rates and convention attendance are above last year's levels,

and most industry contacts expect further improvement through the end of the year.

Manufacturing: Reports on factory activity in the Southeast were mixed in July and

August. Textile and apparel industry contacts reported that sluggish retail sales had led to

reduced orders overall, with the exception of denim. Producers of packaging materials reported

a fall in new orders that they attributed to the recent weakness in consumer spending. Chemical

producers expressed concern that the floods in the Midwest could later contribute to reduced

demand for agricultural chemicals, while cutbacks in the space station program are expected to

add to the job losses already experienced in the aerospace industry. On the other hand, industries

that are closely linked to regional and national housing markets have continued to report increases

in overall business activity. Producers of lumber, carpets, appliances, and furniture continued

to experience gains in production and shipments. However, even in these industries the

expansion in the volume of new orders has declined from the more rapid pace recorded earlier

in the year.

Construction: Realtors again reported strong single-family home sales through the end

of August. Contacts noted that after slowing briefly at the beginning of the summer, home sales

have picked up again. Year-to-date sales continue to outpace last year's relatively strong levels.

New mid-priced homes were said to be selling particularly well, and agents noted that inventories

of both new and existing homes for sale were tight in many market areas. Home builders

reported that increases in demand had kept them extremely busy through August, and that they

saw signs of a shortage of subcontractors available to work on new projects.

VI-3

Multifamily and commercial construction activity remained sluggish across the District,

though several contacts noted improvement in vacancy and rental rates in their market areas. In

particular, large blocks of space are becoming scarce in some of the more desirable locations.

However, no new speculative building projects were announced.

Financial Services: Bankers from across the Southeast reported that loan demand was

flat or up modestly in August. Loans for automobile purchases have been the source of most of

the growth in new consumer loans. Residential mortgage lending also has continued to increase,

but bankers said that about three-quarters of this activity was due to refinancings. Business

lending has been flat and dominated by debt refinancing.

Wages and Prices: Factory contacts reported that prices for both raw materials and

finished goods have been stable in the last two months. However, home builders noted that

lumber prices were beginning to rise again in anticipation of increased demand from the

rebuilding in the Midwestern flood areas. In regard to wages, several firms said that they were

giving their employees only cost-of-living wage increases.

VII-1

SEVENTH DISTRICT--CHICAGO

Summary. Seventh District economic expansion proceeded slowly in July and early August,

while efforts to clean up after the flooding got underway. Reports from a variety of retailing contacts

indicated modest improvement in consumer spending. Housing markets remained relatively active,

although bad weather restricted construction and the delivery of building materials. Manufacturing

activity flattened out during a seasonally slow period, but is generally expected to build momentum over

the rest of the year. Reports from banks indicated that commercial, industrial, and consumer lending

progressed at a somewhat stronger pace. Flood damage and related slow crop development reduced

anticipated agricultural production and left a sizable portion of the remaining corn and soybean crop

vulnerable to an early frost.

Retail Sales. Discussions with retailers, state tourism officials, auto dealers and other contacts

were largely consistent with a modest pickup in consumer spending in July and August. A large discount

store chain reported that same-store sales gains improved in August, with hard lines leading sales, and

results in the District slightly stronger than the national average. While a major department store chain

reported solid gains in back-to-school sales during August, some other retailers stated that back-to-school

sales have proceeded somewhat more slowly than anticipated. One retailer speculated that a burst of

later-than-usual vacations after an extended period of bad weather may have been partly responsible.

According to another retailer, there has also been a trend toward later back-to-school sales, and this

contact stated that continuing sales gains in home furnishings and nonseasonal merchandise were more

indicative of the true underlying momentum in retailing activity. Bad weather limited tourism spending

in Wisconsin in July, but a state official stated that with improvement in weather during August, a

substantial increase in business has occurred in many parts of the state, with record-breaking weeks

reported for one popular tourist area. An auto dealers' exchange stated that volume ran substantially

above year-earlier levels in recent months, and used car prices continued to rise. One of the largest auto

dealers in the District noted that profitability has been improving to a somewhat greater extent than

volume. Inventories are leaner and consumers "aren't beating us up on price so much." A manager of

shopping center properties reported that sales growth for the stores in its centers in the District seemed

little changed thus far in the third quarter. This contact noted relative strength in department store sales

results, and was encouraged that consumers seem increasingly focused on value as opposed to price

alone.

VII-2

Housing and Construction. Bad weather and hesitancy among producers has impeded

residential construction activity through much of the year, but discussions with housing industry contacts

suggested that the underlying tone of the home sales market remained firm. An association of realtors

stated that local boards have been reporting further improvement in sales activity and buyer interest

during the third quarter in Illinois. A realtors' association reported a significant increase in home resales

in Wisconsin during July, and year-to-date sales are now ahead of a record breaking year-earlier period in

spite of relatively weak results in early 1993. One of the largest residential realtors in the District

reported a return to a record selling pace in July, after some softening in its markets during the second

quarter, and early August results remained encouraging. A survey of residential mortgage lenders in

Western Michigan showed a pickup in origination growth in recent months. Two mortgage lenders

reported significant improvement in the housing market in the Detroit area.

Bad weather and the effects of flooding restricted shipments of construction materials through

July and early August. A gypsum wallboard producer expected industry shipments to rise somewhat less

than earlier expected this year, but shipments to the Seventh District were still expected to post a

modestly higher gain than in the nation as a whole. A large cement producer reported relative strength in

shipments for light industrial construction, which combined with extensive public works activity to boost

overall shipments in the absence of improvement in the weak commercial market. This contact stated that

"we definitely see some better times ahead." A cement industry association stated that bad weather did

not affect production, but shipments were delayed in some parts of the region.

Manufacturing. Purchasing managers' survey results and reports from manufacturers indicate

that industrial output in the District flattened out (on a seasonally adjusted basis) during the seasonally

slow months of July and August. Light vehicle assemblies had been scheduled to surge in the third

quarter, but underbuilds during August have pared those expectations. One large automaker expected

output to continue to increase on a seasonally adjusted basis in the third quarter, and this contact

expressed confidence that assemblies would continue to climb into the fourth quarter. Light vehicle

assembly gains in the District have significantly exceeded the national average thus far in 1993, and

District production should benefit when one large facility reopens later in the year. A steel producer

selling into niche markets reported that their order books were full through October and November.

Improvement in demand remains widespread by customer grouping, according to this contact A steel

industry analyst stated that continued relative strength among steel service centers is another sign that

VII-3

improvement in demand has been generalized, and not confined to auto and appliance manufacturers. A

large electronics and communications company stated that strong bookings growth continued, particularly

in orders from Asia. A heavy-duty truck industry analyst reported that net orders in July climbed to their

highest level for that month since 1978. The increase was partly driven by promotions, but there was

little sign of an orders slowdown in preliminary results for August Some small manufacturers that were

closed due to flooding in July have begun the clean-up process.

Banking. Commercial, industrial and consumer lending activity generally continued to improve

in recent months. Several large bank holding companies reported increased liquidity in the large

corporate loan market, with a perceived strengthening in asset quality prompting greater willingness

among banks to extend credit. Heightened competition has reduced the cost of credit lines and the spread

of loan rates over base rates. A regional bank holding company stated that middle-market commercial

loan demand is still "pretty good," with demand for working capital financing more robust than demand

for fixed investment financing. Another middle-market lender stated that commercial borrowers seem to

have increased their tendency to shop around for better loan terms, and competition on rates has

intensified in most borrower classes, with little overall net lending growth. "We are continuing to go

forward at rates we consider acceptable, but the overall market is best characterized as sluggish or weak."

Auto loans still form an important source of strength in consumer lending, according to one regional bank

holding company. A large retailing firm reported continued expansion in outstanding consumer credit,

while a large bank holding company reported that credit card write-offs have been running at their lowest

pace in almost a decade.

Agriculture. Recent flooding is estimated to have led to an expected total production loss of

roughly 4 to 7 percent of this year's intended crop acreage in the hardest-hit District states (Iowa, Illinois

and Wisconsin). Ponding and slow crop development have considerably reduced the yield prospects on

the remaining acreage in Iowa and Wisconsin. Production uncertainties continued into late August, with

ongoing rainfall in much of the District. A sizable portion of the corn and soybeans in the northern half

of the District remain vulnerable to a frost prior to maturity, and even a normal first frost would cause

some damage to this year's late crop.

VIII-1

EIGHTH DISTRICT - ST. LOUIS

Summary

The District economy continues to grow slowly. Floodwater has receded in many

areas, allowing the cleanup to begin. Our flood damage estimate for the District now

stands at $2 billion to $3 billion, up from the $1.5 billion to $2 billion stated in the last

report. The Coast Guard has reopened the Missouri River and is allowing restricted traffic

on the Mississippi River between St. Louis and Cairo, Illinois. Residential construction

has picked up in areas where it was lagging and continues to be strong elsewhere. Total

loans outstanding at a sample of District banks rose less from mid-June to mid-August than

they had in the prior two-month period. Hot, dry weather has hurt crop prospects in the

southern parts of the District.

Consumer Spending

Most retailers throughout the District, except in St. Louis, report that sales are up

between 1 percent and 7 percent over last year. Retailers in St. Louis have not fared as

well, reporting that sales have been flat. Some department stores in Little Rock and

Louisville report double-digit increases. Stores in Little Rock, Louisville and Memphis

also report that back-to-school sales are above expectations, although some say that it is

still too early to report. Contacts in Little Rock and Memphis expect sales this holiday

season to be as good as, if not slightly better than, last year. Some contacts in Louisville

and St. Louis were less optimistic though, expecting sales this holiday season to just match

last year's.

Car dealers report that sales of both new and used domestic cars are up, in many

cases by more than 10 percent, over the same period last year. Import sales, especially

of Japanese cars, however, continue to decline. Most dealers expect that as the model

year changes and the usual year-end incentives are offered, sales over the next few months

will continue their increase from one year ago. Dealers in Louisville, on the other hand,

VIII-2

expect this year's total sales to be slightly lower than last year's because of the decline in

import sales.

Manufacturing and Other Business Activity

Most District firms contacted continue to report slow, steady growth. Many firms

that had suspended operations because of flooding are returning to normal operations. At

the height of the flooding, about 31,500 workers in Missouri were displaced, including

about 10,700 workers in the St. Louis area. As of August 23, approximately 11,000

people statewide, including about 5,000 people in St. Louis, were still believed to be out

of work because of flooding. Most of the displaced workers in St. Louis are from the

Chesterfield area, where the Monarch Levee broke on July 30, flooding about 300

businesses, the second-busiest airport in Missouri and a county jail. Preliminary damage

estimates for this area are between $150 million and $200 million. In Illinois, about 200

of the 500 displaced nonagricultural workers were still believed to be out of work.

While a few reports from District firms not affected by the flooding are negative,

most are upbeat. A mine in southeastern Illinois will close permanently by late

September, eliminating 365 jobs. At the same time, another mine in southern Illinois

reopened, calling back almost 350 workers from a layoff in March. A domestic airline

announced that its corporate headquarters will move to St. Louis from New York. This

relocation, along with one by a medical supply company from Chicago, will bring about

500 jobs into the area.

A contact in the oil-extraction equipment industry reports that, for the first time in

about a year, orders from domestic firms have picked up. In Tennessee, a shirt

manufacturer that closed in early July has reopened, calling back 350 employees, and a

furniture manufacturer will open two new plants, creating 400 new jobs. A major

telecommunications firm, which recently announced widespread reductions in its

workforce, will close its Louisville office, affecting about 120 employees. Many of these

employees will receive other positions within the company, although not necessarily in the

VIII-3

District. In a July survey of District firms by the National Federation of Independent

Businesses, only 13 percent believed that now is a good time to expand.

Construction and Real Estate

Residential construction has picked up some of the momentum it had lost in areas

of the District this spring because of adverse weather conditions. In St. Louis, for

example, single-family home permits rose 8.4 percent in June and 10.1 percent in July

from their year-ago levels, compared with small declines or no increases in prior months.

Elsewhere, single-family home construction continues to buoy area economies: In

Memphis and Little Rock, year-to-date, single-family home permits are up more than 25

percent from 1992.

Banking and Finance

Total loans outstanding at a sample of 104 large, mid-size and small District banks

increased 0.6 percent between mid-June and mid-August, after increasing 1.9 percent

between mid-April and mid-June. Commercial and industrial loans fell 0.8 percent from

June to August, after posting a 1.8 percent drop from April to June. Real estate loans rose

2.2 percent compared with a 3.5 percent increase in the prior period, and consumer loans

declined 1.4 percent compared with a 2.2 percent increase in the prior period.

Agriculture, Natural Resources and Transportation

Weather conditions remain mostly hot and dry in the southern portions of the

District, adversely affecting the region's crops. Cotton producers in certain areas of

Mississippi and Tennessee continue to apply pesticides actively; many believe that

production costs for this year's cotton crop will be much higher than normal. Barge

movement on the Mississippi River is slowly returning to its normal pace, although certain

restrictions remain in effect. One concern is that a logistical problem may develop in the

fall with so many boats and barges moving to New Orleans at the same time. Southern

pine lumber producers are reported to be rebuilding their inventories; however, they

expect only a modest increase in demand associated with the rebuilding efforts from the

flood.

IX-1

NINTH DISTRICT-MINNEAPOLIS

The economy of the Ninth Federal Reserve District continues to grow moderately

and economic conditions are, on balance, positive. Employment is growing in all

district states, and two recently announced large layoffs appear to be the result of

corporate restructuring rather than slack demand. On a sector-by-sector basis,

construction is clearly quite strong and leads the economy. Manufacturing is

improving, especially in small and mid-size firms. Mining output is generally stable,

though a recent strike by iron miners has idled production in Minnesota and the

Upper Peninsula of Michigan. Agriculture is the one sector with declining output;

crop production, especially in Minnesota and the Dakotas, will be down sharply from

1992 levels. Retail sales have apparently slowed somewhat in some parts of the

district, but tourism appears stronger after an initially slow start. Price levels are

stable, with no indication of inflationary pressures.

Employment

Non-farm employment continues at above year-earlier levels in all Ninth District

states. Unemployment rates declined in Minnesota, Montana, South Dakota and

North Dakota. Corporate restructuring caused layoffs of 900 insurance workers in

Minnesota and 1,200 lumber company employees in Montana that were announced

recently. One firm in Rapid City, S.D., announced that it would add over 200 new employees

as did another in Hayward, Wis. Another South Dakota firm added a total of 70 workers to

its plants in Sioux Falls and Huron.

Construction and housing

Construction leads the economy. Publicly awarded construction contracts in Minnesota

and the Dakotas for July were about 30 percent above July 1992, while year-to-date awards

are up nearly 20 percent over year-earlier levels. South Dakota is an especially strong area for

all types of construction, and employment in this sector is at near-record levels. Residential

construction is reportedly the largest element in South Dakota, but commercial construction

IX-2

and public building are also strong. Moreover, a Minneapolis-St. Paul building association

official said that 1993 would surpass 1992 in terms of units built and dollars spent. Houghton

and Hancock, Mich., also report a good construction season as do other regional centers in

Montana and Wisconsin.

Manufacturing

Manufacturing apparently is strengthening. Small manufacturing firms in Minnesota

report good orders as do media reports from other district states. A utility serving large areas

of Wisconsin, Minnesota and South Dakota reports industrial electrical use growing at a rate

substantially above the five-year average. Publicly traded manufacturing firms generally

report improved business; one evaluation of Minnesota-based corporations notes second

quarter 1993 net earnings up 18 percent to 25 percent over 1992 for firms making food

products, industrial machinery, biomedical equipment and consumer products.

Mining

Metal mining output is stable. Gold output in Montana and South Dakota metal mines

has risen somewhat in response to higher prices. A South Dakota gold operation requested

permits for new exploratory drilling, and production has increased at a Montana platinum-

palladium operation. However, Montana copper production fell slightly as one mine closed.

Iron ore output around Lake Superior was above year-earlier levels until a strike idled two

mines in Minnesota and two in Michigan on Aug. 1. No settlement has been reached to date.

Agriculture

Crops in Wisconsin, Minnesota, South Dakota and North Dakota have all suffered

extensive damage from excessive rain and flooding. Aug. 1, 1993, Agricultural Statistics

Service reports estimate that corn production will be down 13 percent in Wisconsin and 30

percent or more in the other affected states, compared to 1992 levels. Soybean production will

be down 8 percent in Wisconsin and 22 percent in Minnesota and South Dakota. All wheat

production is estimated to be down slightly in the Dakotas, down about 20 percent in

Minnesota, but up over 30 percent in Montana. Spring wheat in Minnesota and the Dakotas

is reportedly heavily infested with plant diseases, including one that can render the grain

IX-3

unfit for food use. The full extent of damage is not yet clear, but spring wheat prices have

risen by one-third since mid-June.

However, reflecting good crop conditions in areas not affected by flooding, soybean and

corn prices have subsided from mid-July increases and are now respectively only 12 percent

and 5 percent above pre-flooding levels and about even with year-ago levels.

In the livestock sector, cattle slaughter numbers and prices remain slightly above year-

earlier levels. Hog prices are about 8 percent above year-ago levels and output is essentially

the same. Milk production is down slightly in Wisconsin, but unchanged in Minnesota and

other district states.

Consumer spending and tourism

Consumer spending is mixed. Retail sales vary across the district. In Minnesota, sales

tax collections have fallen behind projections, and retail businesses were the poorest

performing category in a recent report on publicly traded companies based in that state. But

news media and mall managers in regional centers in the Dakotas and Montana report

generally good business, and retail employment in Michigan's Upper Peninsula had the

strongest growth of any sector. Vehicle sales are reported as steady, except in areas affected

by flooding where sales continue to be slack.

The tourism industry is having a good summer season. Montana and western South

Dakota, which have been least affected by adverse weather, continue to have the most

positive reports, while industry sources in Minnesota and Wisconsin report generally

improved traffic after a slow start earlier in the summer.

Prices and wages

There is little evidence of inflationary pressures. Food prices in general are stable.

Gasoline prices continue below year-earlier levels. Housing prices are stable across most of

the district, though up somewhat in the larger urban areas. New wage settlements are

reported to include small increases in direct wages, although health care costs continue to

drive up total labor costs to firms.

X-1

TENTH DISTRICT - KANSAS CITY

Overview. The Tenth District economy is still growing moderately.

Retail sales are up, housing activity is increasing, and demand is up for

consumer loans and home mortgages. The energy sector continues to improve,

and farm income prospects remain healthy despite the wet weather and flooding.

Retail prices generally remain steady, while manufacturers' input prices are

rising modestly.

Retail Sales. District retailers report that sales are up both from a

year ago and a month ago. Retailers generally expect sales to increase

further in the next few months, and most plan to increase inventories over

that period. Retail prices are generally holding steady and are expected to

change little in the months just ahead.

Most auto dealers report continuing strong sales over the past month.

Financing is readily available for dealers and for creditworthy buyers. Most

dealers are trimming their inventories of 1993 models and expect sales to

remain strong for the remainder of the year.

Manufacturing. Most purchasing agents report that input prices are

modestly higher than a year ago. Input prices are expected to remain at

current levels in the near term. A few purchasing agents report problems

getting materials because of the flooding, but they do not expect the problems

to be long term. Some respondents are trimming inventories, while others are

increasing inventories. Many plants are operating near capacity but with few

bottlenecks. Exporting firms expect foreign sales to remain steady or

increase slightly.

Energy. Improvement in drilling activity in the district continues

despite generally low oil prices. The average number of operating drilling

X-2

rigs in district states rose from 240 in June to 249 in July. During the

first three weeks of August, the district rig count climbed to 259. As a

result, the average rig count stands about 17 percent higher than during the

same period a year ago.

Housing. Builders report that housing starts are down slightly from a

year ago due to the weather. Still, starts are up from last month and are

expected to increase for the rest of the year. Strong demand for new homes

has reduced the stock of unsold homes and increased prices of new homes.

Materials prices are also up and are expected to rise slowly in the near

future.

Mortgage demand is strong but is expected to wane slightly as winter

approaches. Mortgage rates have fallen further in recent weeks but

respondents do not expect them to fall much more over the rest of the year.

Banking. Growth in loan demand last month was mixed, with half the

survey respondents reporting increases in loan demand and half reporting no

change. Commercial and industrial loan demand was mostly unchanged. Demand

was up at most banks for consumer loans and home mortgages. Home equity, home

construction, and commercial real estate loans were constant to up. Loan-

deposit rations were constant to up, compared with both the previous month and

a year ago.

None of the respondents changed their prime rate last month, and none

expect to change it in the near term. A few banks lowered consumer lending

rates, but most banks reported no change. Lending standards were unchanged.

Deposit flows of responding banks were also mixed last month. Half

reported decreases in deposits, while half reported either no change or

increases. Demand deposits and NOW accounts were constant to up at most

X-3

responding banks. IRA and Keogh accounts, large CDs, and small time and

savings deposits were constant to down at most responding banks.

Agriculture. Heavy rains and flooding have reduced the expected size of

the district's crop of corn and soybeans. Much of the crop in low-lying areas

along the Missouri River and its tributaries in Missouri, Kansas, and Nebraska

will be a total loss. Moreover, wet weather has delayed the maturity of the

remainder of the crop, leaving it vulnerable to an early cold snap. The

district's winter wheat harvest is now complete and crop yields were generally

very good, although in some areas yields and quality were reduced by heavy

rains, hail, and disease. In Oklahoma, the cotton and peanut crops remain in

good condition.

The smaller-than-expected corn and soybean crops--key ingredients in

livestock feed--have pushed up feed costs and trimmed profits somewhat for

district cattle and hog producers. In response, some cattle feeders have

reduced cattle inventories. The district's large-scale pork producers,

however, maintain rigid production schedules that are unfazed by modest

changes in feed costs.

Overall, despite the recent weather problems, prospects for farm income

in the district remain healthy. While crop losses caused by wet weather and

flooding will create financial hardship for many district farmers, higher crop

prices will boost incomes for the majority who escaped the flooding and expect

to harvest normal or near normal crops. Meanwhile, despite somewhat higher

feed costs, strong cattle and hog prices continue to support solid earnings

for most district livestock producers.

ELEVENTH DISTRICT--DALLAS

The District economy expanded at a moderate pace in July and August.

Many respondents reported a pickup in sales and employment. Orders were strong

in several manufacturing industries. Respondents in business service

industries reported an increase in business activity. Retail sales continued

to increase slowly. Homebuilding remained strong. Banking respondents said

that loan demand picked up. The energy extraction industry showed continued

improvement in response to strength in natural gas prices. Overall, crops in

the District are expected to fare better than last year.

Most manufacturers reported a pickup in orders and an improved outlook.

Several respondents noted an increase in employment. Producers of stone, clay,

glass, lumber and fabricated metals reported strong gains in orders

originating from the residential construction sector. Employment was reported

to have increased in many of these construction-related industries. Orders for

semiconductors and telecommunications devices were reported to be strong and

employment levels have increased. Producers of food and kindred products said

that sales and employment had increased. A steel industry respondent noted

that orders continued to increase even though they recently implemented a

price increase. Oil field equipment producers said that domestic orders have

improved but that international drilling remains weak. Paper producers noted

an increase in orders and employment. The petrochemical producers continue to

report global overcapacity problems and weak exports. Refinery respondents

reported that their margins improved slightly in August.

Most business service firms reported a pickup in activity and a positive

XI-2

outlook. Temporary employment agencies report an increase in demand, partly

because their clients are resisting hiring full-time workers, but also because

business activity is increasing. The demand for part-time workers was broad

based, although particular strength was reported for the professional fields

such as accounting and engineering. Several law firms reported increases in

employment. Accounting contacts said that business activity has picked up over

the past three months. The main source of growth for accounting firms was

reported as consulting on methods to increase productivity. Advertising

respondents said that activity has risen because of increased demand from the

auto, retail and nondurable goods industries. Hotels in the Dallas, San

Antonio and Austin areas reported high occupancy.

Retail sales continued to grow slowly. Retailers generally were

optimistic that sales growth will pick up. Respondents report that strong

competition within the industry has been restraining prices increases.

Inventories are reported to be back at desired levels. Some retailers had

experienced an unintended buildup during the early summer. Sales along the

Mexican border are still below last year's levels although there are scattered

reports of improvement. District auto sales slowed in July but year-to-date

sales remain above last year's level.

Residential construction remains strong in many areas of the District.

Respondents report that new home sales slowed somewhat in July but picked up

again in early August. Construction is particularly strong in San Antonio and

Austin, and weak in Houston. Respondents report that home sales are likely to

remain strong as long as mortgage rates remain low.

The District oil and gas drilling rig count continues to rise. Activity

XI-3

in the Gulf of Mexico remains very strong. Oil prices rose to about $18 per

barrel in August after falling to $17 per barrel in July because of

speculation that Iraq would reenter world oil markets, and discord within

OPEC. Hot weather throughout the Southern tier of the United States pushed up

natural gas prices in the last few weeks of August.

Most banking respondents reported that loan demand has picked up and is

up over 1992. Mortgage originations and refinancings remain a bright spot.

Respondents generally were optimistic about future loan demand. Respondents

said that competition among banks for the best borrowers was beginning to

intensify because the larger banks were becoming more aggressive.

Continued dry conditions in the District have had a negative impact on

agricultural conditions in many areas. Overall crop production, however, is

expected to fare better than last year. West Texas and areas north of Lubbock

are expecting good cotton crops. Dry weather is having a negative impact on

crop production in parts of central Texas. Many pastures have dried out

forcing producers to move cattle to market. In general, however, cattle

ranchers report favorable conditions. Higher prices for most livestock and

livestock products pushed the Texas All Farm Products index slightly higher in

July. Prices for most crops declined and the Texas All Crops Index was 10.7

percent below a year ago. Producers were receiving higher prices for hay,

sorghum and soybeans but lower prices for other crops.

XII- 1

TWELFTH DISTRICT -- SAN FRANCISCO

Summary

Economic activity is mixed across the Twelfth District. Economic recovery continues to

elude California, while intermountain areas expand. In California, weakness continues to be reported

in a broad range of sectors-including aerospace and defense-related manufacturing, trade,

construction, finance, and government. Some strength is reported, however, in California's motion

picture and nondurable manufacturing sectors. Sluggish conditions also are reported in western

Washington, affected by retrenchment in aerospace, and Hawaii, undergoing a slump in the visitor

industry. In contrast, conditions are stronger in eastern Washington, Utah, Idaho, and Nevada.

Business Sentiment

Sentiment among Twelfth District business leaders is little changed from our July report.

About half of the respondents expect the real economy to expand during the next four quarters at a

rate at or above trend growth. This proportion is about the same as in July and June, but is down

from two-thirds in April and three-quarters in March. Most other respondents expect the economy to

expand, but at a rate below trend.

Many respondents expect the recent federal budget agreement to have short-run negative

effects on their regions and industries. Defense cuts reportedly will hurt manufacturing in California;

higher tax rates are expected to affect small business owners, farmers, and individuals in high-income

states such as California and Hawaii; and residents in areas with long driving distances are concerned

about the effects of higher fuel taxes. Businesses and consumers are reportedly cautious due to the

tax changes, and some hiring decisions also are being delayed due to uncertainty about health reform.

Retail Trade and Services

Retail activity varies widely across the District, and reflects the underlying regional economic

XII - 2

strength. Low interest rates are reported to have had only a limited effect on purchasing decisions.

In both northern and southern California, retail sales are flat and consumer confidence is reported

down due to continued job losses. Retail sales in western Washington also are reported slow due to

concern over the regional economy. In contrast, sales in eastern Washington have continued strong

for more than a year and consumer confidence has remained high. Consumer confidence remains

very strong in Utah and Idaho, with retail sales reported up nearly 10 percent during the first half of

1993 from a year earlier, and auto sales reported strong.

Conditions in service-related industries are mixed. Idaho and Utah are having record years in

tourism. In contrast, the Hawaii visitor industry has slumped--affected by recessions in both

California and Japan. During the first half of 1993, visitor totals in Hawaii hit a five-year low. In

California, business services have strengthened recently, particularly in Orange County.

Furthermore, the motion picture industry in Los Angeles is growing at a double-digit pace, and

summer box-office revenues are at record levels. Local governments in California are suffering

budget shortfalls and in parts of southern California they are asking for major wage concessions from

public employees.

Manufacturing

Manufacturing activity is mixed in the District, with weakness centered in aerospace and

defense-related industries. In Washington, Boeing currently is cutting production of several aircraft

models. Furthermore, concern is reported for future production levels at the company due to

uncertainty about foreign orders. One contact with a smaller aerospace components firm expects that

its current backlog of orders will fall 50 percent by 1994. California defense firms continue to shrink

due to cutbacks and restructuring in defense and aerospace. Southern Arizona, however, is

benefitting from a shift of aerospace production activity from California.

A few manufacturing industries show signs of improvement. In California, orders and sales

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have risen in the semiconductor industry, but the increased demand has yet to translate into higher

employment. Contacts also report strength in California textiles, apparel, and fruit and vegetable

production. Strength outside of California includes electronics in Oregon and Idaho, and construction

equipment in Utah.

Agriculture and Resource-Related Industries

Most contacts report a generally favorable outlook for agriculture. In California, most

vegetable crops are reported to be in good condition. Tree fruit yields are high, but sales are slow

and prices are low. In contrast, tomato yields are off but prices are reported very good. Cattle

prices are rebounding from summer lows, demand is good, and export volume is expected to rise.

Lumber prices are reported up 30 percent from a year earlier. A contact from Nevada reports that

new mines are opening due to higher gold prices; higher fuel taxes, however, will increase delivery

and transportation costs from remote locations.

Construction and Real Estate

District construction and real estate markets are mixed. In California, despite low interest

rates, single-family home sales are little changed from their year-earlier levels. In Hawaii, sales of

existing homes are down 18 percent from a year earlier. The median sales price in Honolulu,

however, stands at $358,000, up 5.6 percent from a year earlier and the highest in the nation. In

Oregon, immigration from California and low interest rates are reported to have stimulated housing

construction, and apartment market conditions are reported tight with vacancy rates less than 4

percent. In Washington, downtown office vacancy rates have stabilized, but no major new demand or

construction is reported except by owner/users. Reflecting at least in part a shift in aerospace

production, the Tucson housing market is booming both in new construction and sales of existing

homes. Idaho and Utah construction and real estate markets remain strong.

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Financial Institutions

Varied conditions are reported across District financial markets. In California, contacts report

conditions in the banking industry as showing modest signs of improvement; outstanding loan volume

continues to decline, but at slower pace than has been seen in recent months, while some measures of

asset quality are improving. One contact, however, reports that banks continue to be restrictive in

providing financing to small businesses throughout California. In Oregon, banking conditions are

reported good in part due to strong construction and mortgage lending in the Portland area. Contacts

in Utah report strong bank earnings for the first half of 1993 and improvement in balance sheets at

most financial institutions.